TELECOMUNICACIONES DE PUERTO RICO INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

|X| Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended: June 30, 2002

Or

| | Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the transition period from _______ to _______

Commission File Number 333-85503

TELECOMUNICACIONES DE PUERTO RICO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

COMMONWEALTH OF PUERTO RICO 66-0566178
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

1515 FD ROOSEVELT AVENUE
GUAYNABO, PUERTO RICO 00968
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: 787-792-6052

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES |X| NO | |

1

INDEX

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited) 3

Condensed consolidated balance sheets--June 30, 2002 and December 31, 2001 3

Condensed consolidated statements of income and comprehensive income--Three 4
months ended June 30, 2002 and 2001; Six months ended June 30, 2002 and 2001

Condensed consolidated statements of changes in shareholders' 5
equity--Six months ended June 30, 2002 and year ended
December 31, 2001

Condensed consolidated statements of cash flows--Six months ended June 30, 2002 6
and 2001

Notes to condensed consolidated financial statements 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26

Item 3. Quantitative and Qualitative Disclosures about Market Risk 39

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 40

Item 2. Changes in Securities and Use of Proceeds 40

Item 3. Defaults Upon Senior Securities 40

Item 4. Submission of Matters to a Vote of Security Holders 40

Item 5. Other Information 40

Item 6. Exhibits and Reports on Form 8-K 40

SIGNATURES 41

EXHIBIT INDEX 42

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 20,937 $ 34,797
Accounts receivable, net of allowance for doubtful accounts
of $114,306 and $107,436 in 2002 and 2001, respectively 394,918 359,914
Inventory and supplies, net 21,049 24,755
Prepaid expenses 17,957 11,610
------------ ------------
Total current assets 454,861 431,076
PROPERTY, PLANT AND EQUIPMENT, net 1,583,665 1,631,770
GOODWILL, net 126,927 178,094
INTANGIBLES, net 180,162 180,370
DEFERRED INCOME TAX 307,078 221,499
OTHER ASSETS 111,766 105,441
------------ ------------
TOTAL ASSETS $ 2,764,459 $ 2,748,250
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term debt $ 308,846 $ 494,335
Other current liabilities 311,246 345,203
------------ ------------
Total current liabilities 620,092 839,538
LONG-TERM DEBT, excluding current portion 854,890 701,441
PENSION AND OTHER POST-EMPLOYMENT BENEFITS 484,246 531,636
OTHER NON-CURRENT LIABILITIES 127,776 126,561
------------ ------------
Total liabilities 2,087,004 2,199,176
------------ ------------

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 11,421 10,759
------------ ------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Common stock 701,952 701,952
Deferred ESOP compensation (28,793) (28,793)
Subscription receivable (73,237) (109,959)
Retained earnings 144,589 53,592
Accumulated other comprehensive loss (78,477) (78,477)
------------ ------------
Total shareholders' equity 666,034 538,315
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,764,459 $ 2,748,250
============ ============

The accompanying notes are an integral part of these financial statements.

3

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands)

FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)

REVENUES:
Local services $ 144,646 $ 144,112 $ 286,445 $ 283,447
Long distance services 36,193 47,851 74,985 94,554
Access services 83,039 91,533 164,137 181,594
Cellular services 42,778 48,827 85,001 87,842
Paging services 1,363 4,180 3,287 9,680
Directory services 12,206 12,520 12,307 12,610
Other services and sales 13,161 18,773 27,921 38,575
--------- --------- --------- ---------
Total revenues 333,386 367,796 654,083 708,302
--------- --------- --------- ---------

OPERATING COSTS AND EXPENSES:
Labor and benefits 90,880 99,638 188,639 196,945
Other operating expenses 103,948 110,403 210,087 203,648
Early retirement provision -- 7,154 -- 11,000
Depreciation and amortization 66,674 66,680 132,974 135,868
--------- --------- --------- ---------
Total operating costs and expenses 261,502 283,875 531,700 547,461
--------- --------- --------- ---------

OPERATING INCOME 71,884 83,921 122,383 160,841
--------- --------- --------- ---------

OTHER INCOME (EXPENSE):
Interest expense, net (11,582) (15,310) (25,703) (30,296)
Equity income from joint venture 576 530 1,152 1,060
Minority interest in consolidated subsidiary (295) 26 (660) 26
--------- --------- --------- ---------
Total other income (expense), net (11,301) (14,754) (25,211) (29,210)
--------- --------- --------- ---------

INCOME BEFORE INCOME TAX 60,583 69,167 97,172 131,631

INCOME TAX EXPENSE (BENEFIT) (20,019) 22,842 (6,434) 48,843
--------- --------- --------- ---------

NET INCOME AND COMPREHENSIVE INCOME $ 80,602 $ 46,325 $ 103,606 $ 82,788
========= ========= ========= =========

The accompanying notes are an integral part of these financial statements.

4

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(In thousands)

ACCUMULATED
DEFERRED RETAINED OTHER
COMMON ESOP SUBSCRIPTION EARNINGS COMPREHENSIVE
STOCK COMPENSATION RECEIVABLE (DEFICIT) LOSS TOTAL
--------- ------------ ------------ --------- ------------- --------

BALANCE, DECEMBER 31, 2000 $ 700,220 $ (28,653) $ (141,323) $ (7,002) $ (25,475) $497,767

Net income -- -- -- 118,456 -- 118,456
Dividends paid -- -- -- (57,862) -- (57,862)
Accretion of discount on subscription receivable -- -- (8,636) -- -- (8,636)
PRTA capital contribution -- -- 40,000 -- -- 40,000
Release of ESOP shares 1,732 1,420 -- -- -- 3,152
Advance to ESOP -- (1,535) -- -- -- (1,535)
Other ESOP contribution -- (25) -- -- -- (25)
Minimum pension liability adjustment -- -- -- -- (53,002) (53,002)
--------- ------------ ------------ --------- ------------- --------

BALANCE, DECEMBER 31, 2001 $ 701,952 $ (28,793) $ (109,959) $ 53,592 $ (78,477) $538,315
(Unaudited)
Net income, for the six months ended
June 30, 2002 -- -- -- 103,606 -- 103,606
Dividends paid -- -- -- (12,609) -- (12,609)
Accretion of discount on subscription receivable -- -- (3,278) -- -- (3,278)
PRTA capital contribution -- -- 40,000 -- -- 40,000
--------- ------------ ------------ --------- ------------- --------

BALANCE, JUNE 30, 2002 $ 701,952 $ (28,793) $ (73,237) $ 144,589 $ (78,477) $666,034
========= ============ ============ ========= ============= ========

The accompanying notes are an integral part of these financial statements.

5

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

FOR THE SIX MONTHS ENDED
JUNE 30,
2002 2001
--------- ---------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 103,606 $ 82,788
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 132,974 135,868
Provision for uncollectible accounts 29,470 24,152
Deferred income tax (34,412) 16,995
Accretion of discount on subscription receivable (3,278) (4,514)
Equity income from joint venture (1,152) (1,060)
Early retirement provision -- 11,000
Release of ESOP shares -- 2,876
Gain on sale of subsidiary stock -- (5,414)
Minority interest in consolidated subsidiary 660 (26)
Changes in assets and liabilities:
Accounts receivable (64,474) (38,745)
Inventory and supplies 3,706 3,473
Prepaid expenses and other assets (8,682) (6,887)
Other current and non-current liabilities (32,216) (108,682)
Pension and other post-employment benefits (47,390) (49,982)
--------- ---------
Net cash provided by operating activities 78,812 61,842
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs (85,355) (68,336)
Net salvage on retirements and other 755 (1,030)
Proceeds from sale of subsidiary stock -- 16,367
--------- ---------
Net cash used in investing activities (84,600) (52,999)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 40,000
Net repayments of short-term debt, including
capital leases (185,463) (41,905)
Borrowings of long-term debt 150,000 --
Dividends paid (12,609) (17,253)
--------- ---------
Net cash used in financing activities (8,072) (19,158)
--------- ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS (13,860) (10,315)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 34,797 30,834
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,937 $ 20,519
========= =========

The accompanying notes are an integral part of these financial statements.

6

TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------

1. BUSINESS / CORPORATE STRUCTURE

Telecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (the
"Company"), holds 100% of the common stock of Puerto Rico Telephone
Company, Inc. ("PRTC"), PRT Larga Distancia, Inc. ("PRTLD"), and Datacom
Caribe, Inc. ("Datacom"). The Company also holds a 67% interest in
Coqui.net Corporation ("Coqui.net"), in which Popular, Inc., one of our
shareholders, holds the remaining 33% interest, and a 25% interest in
Verizon Information Services, Inc. ("VISI"), in which GTE Holdings (Puerto
Rico) LLC, our majority shareholder, holds a 36% interest. The Company is
the largest telecommunications service provider in Puerto Rico. PRTC is
the incumbent local exchange carrier for the island of Puerto Rico.
Wireline service is provided by PRTC and cellular and paging services are
provided by the wireless division of PRTC. The Company's off-island long
distance service is provided by PRTLD. The Company's dial-up Internet
access service is provided by Coqui.net. The Company's directory
publishing revenues are generated by VISI.

GTE Corporation ("GTE"), through its subsidiary GTE Holdings (Puerto Rico)
LLC, acquired a 40% interest in and management control over the Company on
March 2, 1999 from Puerto Rico Telephone Authority ("PRTA"), an entity of
the Commonwealth of Puerto Rico (the "Acquisition"). In the Acquisition,
Popular, Inc. acquired a 10% interest in the Company. GTE and Bell
Atlantic Corporation merged on June 30, 2000 to form Verizon
Communications Inc. ("Verizon"). On January 25, 2002, GTE Holdings (Puerto
Rico) LLC, and Popular, Inc., acquired an additional 12% and 3% interest
in the Company, respectively, by exercising an option each held since the
Acquisition (the "Option Exercise"). Verizon and Popular, Inc. obtained
the additional ownership interest from PRTA Holdings Corp., an entity of
the PRTA ("PRTA Holdings"). Verizon and Popular, Inc. paid PRTA Holdings
$138 million and $34 million, respectively, for a total of $172 million in
cash for the additional 3,750,000 shares at a $45.9364 per share price
established in the Share Option Agreement. The Company is an affiliate of
Verizon, which now consolidates the Company's financial results with its
own financial results.

PRTC/VERIZON WIRELESS MERGER

On May 1, 2002, the Company completed a tax-free reorganization whereby it
merged Verizon Wireless Puerto Rico, Inc. ("Verizon Wireless") into PRTC.
Prior to the merger, the Company created a new wholly owned subsidiary,
PRTLD, to carry the off-island long distance business previously provided
by Verizon Wireless. The objectives for the reorganization were to (i)
integrate the wireline and wireless operations without jeopardizing the
continuity of the off-island long distance license, (ii) simplify the
overall corporate structure to reduce administrative costs, and (iii)
provide better control and monitoring of the off-island long distance
business and increase its potential for growth in Puerto Rico. As a result
of this merger, the Company released a deferred tax valuation allowance,
related to the Acquisition, of approximately $93 million, of which
approximately $51 million was recorded against goodwill and approximately
$42 million was recorded as a deferred tax benefit in the Company's
consolidated statement of income for the second quarter of 2002 in
accordance with SFAS 109.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements have been
prepared pursuant to rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. Management believes the
financial statements include all adjustments and recurring accruals
necessary to fairly present the results of operations and financial
condition for the interim periods shown. The December 31, 2001 condensed
consolidated balance sheet was derived from audited financial statements
and should be read in conjunction with the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2001.

7

RECLASSIFICATIONS

Reclassifications of prior periods' data have been made to conform to the
current period's presentation.

3. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS

BUSINESS COMBINATIONS AND ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLES

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141, which applies to business combinations occurring after June 30,
2001, requires that the purchase method of accounting be used and includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in the combination. The adoption of SFAS No.
141 did not have an effect on the Company's financial statements.

Effective January 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142
no longer permits the amortization of goodwill and other indefinite-lived
intangible assets, which will result in reducing amortization expense for
2002 by $15 million. Under SFAS 142 assets must be reviewed annually (or,
under certain conditions, more frequently) for impairment for each
reporting unit. The Company has three reporting units; wireline, wireless
and dial-up Internet access.

The Company, together with an independent appraiser, performed the
impairment test for the three reporting units. The evaluation revealed
that the assets of the three reporting units were fully realizable. The
Company intends to perform future tests for impairment at least annually
and more often if the Company believes that events or circumstances
warrant such action.

The following financial information represents the adjusted condensed
consolidated results of operations of the Company as if the adoption of
SFAS 142 had been applied to the prior period presented. The adjusted
results presented below exclude the effects (net of tax) of the
amortization of goodwill and other indefinite life intangibles.

FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
(ADJUSTED) (AS REPORTED) (ADJUSTED) (AS REPORTED)
2002 2001 2001 2002 2001 2001
--------- ---------- ------------- --------- ---------- -------------
(In thousands)

Revenues $ 333,386 $ 367,796 $ 367,796 $ 654,083 $ 708,302 $ 708,302

Operating costs and expenses 261,502 279,958 283,875 531,700 539,627 547,461
--------- ---------- ------------- --------- ---------- -------------

Operating income 71,884 87,838 83,921 122,383 168,675 160,841

Other expense, net 11,301 14,754 14,754 25,211 29,210 29,210
--------- ---------- ------------- --------- ---------- -------------

Income before income tax 60,583 73,084 69,167 97,172 139,465 131,631

Income tax expense (benefit) (20,019) 23,932 22,842 (6,434) 51,023 48,843
--------- ---------- ------------- --------- ---------- -------------

Net income $ 80,602 $ 49,152 $ 46,325 $ 103,606 $ 88,442 $ 82,788
========= ========== ============= ========= ========== =============

8

The following table reconciles net income reported for the quarter and six
months ended June 30, 2001, respectively, to the adjusted net income for
the same period, as required by the provisions of SFAS 142.

FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
2001 2001
------------- ------------
RECONCILIATION: (In Thousands)

Net income, as reported $ 46,325 $ 82,788
Discontinued amortization of goodwill 1,879 3,758
Discontinued amortization of other
indefinite life intangibles 2,038 4,076
Tax effect (1,090) (2,180)
------------- ------------
Adjusted net income $ 49,152 $ 88,442
============= ============

ASSET RETIREMENT OBLIGATIONS

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard provides the accounting for the
cost of legal obligations associated with the retirement of long-lived
assets. SFAS No. 143 requires that companies recognize the fair value of a
liability for asset retirement obligations in the period in which the
obligations are incurred and capitalize that amount as part of the book
value of the long-lived asset. That cost is then depreciated over the
remaining life of the underlying long-lived asset. The Company is required
to adopt SFAS No. 143 effective January 1, 2003. The adoption of this new
standard is not expected to have any impact on the Company's future
results of operations or financial position.

ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

In August 2001, the FASB issued SFAS No. 144. This standard supersedes
SFAS No. 121 and the provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" with regard to reporting
the effects of a disposal of a segment of a business. SFAS No. 144
establishes a single accounting model for assets to be disposed of by sale
and addresses several SFAS No. 121 implementation issues. The Company
adopted SFAS No. 144 effective January 1, 2002 and the adoption thereof
did not have an impact on its financial statements.

EXTINGUISHMENTS OF DEBT AND ACCOUNTING FOR CERTAIN CAPITAL LEASE
OBLIGATIONS

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and
Technical Corrections." For most companies, SFAS No. 145 will require gain
and losses on extinguishments of debt to be classified as income or loss
from continuing operations rather than as extraordinary items as
previously required under SFAS No. 4. However, extraordinary treatment
will be required for certain extinguishments as provided in APB Opinion
No. 30. This statement also amends SFAS No. 13 to require certain
modifications to capital leases be treated as sale-leaseback transactions
and modifies the accounting for sub-leases. In addition, the FASB
rescinded SFAS No. 44, which addressed the accounting for intangible
assets of motor carriers and made numerous technical corrections. The
adoption of this new standard is not expected to have an impact on the
Company's financial condition and results of operations.

ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. The Company is required to adopt SFAS No. 146 effective
January 1, 2003. The adoption of this new standard is not expected to have
a material impact on the Company's future results of operations or
financial position.

9

4. PROPERTY, PLANT AND EQUIPMENT

USEFUL JUNE 30, DECEMBER 31,
LIVES (YRS) 2002 2001
----------- ---------- ------------
(In thousands)

Outside plant 7.2 $2,000,529 $ 1,978,670
Central office and transmission equipment 4.6 1,264,722 1,228,540
Equipment and other 3.7 373,198 357,885
Buildings 19.0 331,300 334,307
Land N/A 25,377 25,309
---------- ------------
Gross plant in service 3,995,126 3,924,711
Less: accumulated depreciation 2,509,969 2,407,760
---------- ------------
Net plant in service 1,485,157 1,516,951
Construction in progress 98,508 114,819
---------- ------------
Total $1,583,665 $ 1,631,770
========== ============

5. GOODWILL

Following is a breakdown of goodwill by reporting unit.

JUNE 30, 2002 DECEMBER 31, 2001
----------------------------------- -----------------------------------

COST ACC. AMORT. BOOK VALUE COST ACC. AMORT. BOOK VALUE
-------- ----------- ---------- -------- ----------- ----------
(In thousands)

Wireline (PRTC) $122,373 $ 19,642 $ 102,731 $173,540 $ 19,642 $ 153,898
Dial-up Internet (Coqui.net) 30,542 6,346 24,196 30,542 6,346 24,196
-------- ----------- ---------- -------- ----------- ----------
Total $152,915 $ 25,988 $ 126,927 $204,082 $ 25,988 $ 178,094
======== =========== ========== ======== =========== ==========

6. INTANGIBLES

JUNE 30, 2002 DECEMBER 31, 2001
----------------------------------- -----------------------------------

COST ACC. AMORT. BOOK VALUE COST ACC. AMORT. BOOK VALUE
-------- ----------- ---------- -------- ----------- ----------
(In thousands)

INDEFINITE LIFE:
Wireline concession $ 96,000 $ 10,880 $ 85,120 $ 96,000 $ 10,880 $ 85,120
FCC Cellular licenses 30,361 6,506 23,855 30,361 6,506 23,855

DEFINITE LIFE:
Wireline trade name 48,400 6,453 41,947 48,400 5,485 42,915
Software licenses 39,948 11,839 28,109 35,501 8,453 27,048
Customer base 15,544 14,413 1,131 15,544 14,112 1,432
Other 500 500 -- 500 500 --
-------- ----------- ---------- -------- ----------- ----------
Total $230,753 $ 50,591 $ 180,162 $226,306 $ 45,936 $ 180,370
======== =========== ========== ======== =========== ==========

10

7. OTHER ASSETS

JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(In thousands)

Deferred activation and installation costs $ 57,477 $ 49,744
Notes receivable-equipment sales 17,977 21,394
Deferred pension asset 15,010 15,010
Investment in VISI 5,272 4,119
Interest rate swap 4,576 1,147
Deferred financing costs, net 4,366 5,044
Other deferred costs 3,893 6,205
Other assets 3,195 2,778
-------- ------------
Total $111,766 $ 105,441
======== ============

8. OTHER CURRENT LIABILITIES

JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(In thousands)

Accounts payable $ 79,451 $ 126,316
Accrued expenses 71,525 83,631
Employee benefit accruals 61,306 57,770
Carrier payables 53,563 36,774
Taxes 38,789 32,739
Interest 6,612 7,973
-------- ------------
Total $311,246 $ 345,203
======== ============

9. EARLY RETIREMENT AND VOLUNTARY SEPARATION PROGRAMS

An early retirement program was offered to management employees in
December 2000. Those choosing to retire received a credit for three years
additional service, five years of additional age, and were immediately
eligible for retiree medical benefits. A $4 million non-cash provision was
recorded in the first quarter of 2001 based on 13 employee acceptances
during this period.

In addition, an early retirement and voluntary separation program was
offered to approximately 200 non-union employees in the Customer Contact
division in the first quarter of 2001. Those eligible to retire received a
credit for three years additional service, three years of additional age;
a separation bonus based on years of service, averaging eight months of
salary, and were immediately eligible for retiree medical benefits.
Non-retirement eligible employees received the separation bonus. A $7
million provision was recorded in the second quarter of 2001 based on 19
early retirement and 52 voluntary separation acceptances during this
period. A provision of $11 million was recorded by the Company in
connection to these early retirement and voluntary separation programs for
the six months period ended June 30, 2001.

11

10. DEBT

JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
(In thousands)

Senior notes:
Due May 15, 2006 at 6.65% $ 399,908 $ 399,900
Due May 15, 2009 at 6.80% 299,875 299,866
Due May 15, 2002 at 6.15% -- 299,991
Interest rate swap 4,576 1,147
Term credit facilities:
Due May 16, 2004 at 70 basis points over LIBOR 50,000 --
Due May 31, 2004 at 75 basis points over LIBOR 50,000 --
Due June 24, 2005 at 100 basis points over LIBOR 50,000 --
Commercial paper 308,702 94,100
Working capital credit facility -- 100,000
Capital leases 675 772
---------- ------------
Total 1,163,736 1,195,776
Less short-term debt 308,846 494,335
---------- ------------
Long-term debt $ 854,890 $ 701,441
========== ============

The senior notes, commercial paper, term credit facilities, working
capital facility, and bank notes are unsecured and non-amortizing. PRTC is
the guarantor of these instruments.

The Company has a $500 million commercial paper program, which is backed
by a bank note facility, with maturities not to exceed 365 days. The
commercial paper dealer agreement was signed in November 2000. The bank
note is a syndicated five-year revolving facility expiring in March 2004.
Amounts outstanding under this facility bear interest at 32.5 basis points
over six months LIBOR. The bank note credit agreement includes financial
covenants, the most significant being that the outstanding principal
balance will not exceed four times adjusted Earnings Before Interest,
Taxes, Depreciation, and Amortization ("EBITDA"), as defined in the
facility agreement.

The Company also has a $90 million working capital credit facility with
Banco Popular de Puerto Rico, an affiliate of Popular, Inc. Amounts
outstanding under this facility bear interest at a rate of 30 basis points
over LIBOR. This facility was renewed in June 2002 with a term of one
year.

The Company entered into an interest rate swap contract on August 31, 2001
at a notional amount of $150 million. The purpose of the swap is to hedge
against changes in the fair value of the Company's senior notes to achieve
a targeted mix of fixed and variable rate debt. The swap receives interest
at a fixed rate of 6.65% and pays interest at a variable rate equal to six
month LIBOR plus 170 basis points, with semiannual settlements and reset
dates every May 15 and November 15 until maturity of the May 15, 2006
senior note. The swap was entered into "at market" and as a result, there
was no exchange of premium at the initial date of the swap. The Company
designates the swap as a hedge of the changes in fair value of the senior
notes due to changes in the designated benchmark interest rate. PRTC
serves as guarantor on the interest rate swap.

12

Aggregate maturities of the senior notes and term credit facilities are as
follow:

AMOUNT
-------------
(In thousands)

2004 $ 100,000
2005 50,000
2006 400,000
2009 300,000
-------------
Total $ 850,000
=============

11. OTHER NON-CURRENT LIABILITIES

JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(In thousands)

Deferred activation and installation revenues $ 57,477 $ 49,744
Customer deposits 27,845 27,911
Other liabilities 42,454 48,906
-------- ------------
Total $127,776 $ 126,561
======== ============

12. SHAREHOLDERS' EQUITY

COMMON STOCK

Common stock consists of fifty million authorized shares, no par value, of
which twenty five million shares were outstanding at June 30, 2002 and
December 31, 2001.

SUBSCRIPTION RECEIVABLE

The subscription receivable reflects future receipts from the PRTA at its
present value (at an 8% discount rate). As part of the Acquisition
agreement, the PRTA agreed to contribute cash or stock of $200 million as
a capital contribution in equal $40 million installments over five years
on March 2 of each year, beginning on March 2, 2000. The stock purchase
agreement requires that the Company contribute $66 million, which includes
the $40 million received from PRTA, to the pension plan upon receipt of
the proceeds on March 2nd of each year. The Company received the third $40
million installment in March 2002 and made the required pension payment of
$66 million.

ACCUMULATED OTHER COMPREHENSIVE LOSS

The accumulated other comprehensive loss represents unrecognized losses,
other than unrecognized prior service costs, associated with the hourly
pension fund since the accumulated benefit obligation exceeds the fair
value of plan assets at December 31, 2001.

DIVIDENDS

The shareholders agreement requires the payment of dividends equal to at
least 50% of net income, to be paid quarterly to the extent funds are
legally available.

The Company paid dividends of approximately $13 million for the six months
ended June 30, 2002. During the second quarter of 2002, the Company paid
dividends of $12 million applicable to the first quarter 2002 net income.
Prior to that, the Company paid dividends of $1 million in March 2002
pertaining to the fourth quarter 2001 net income.

The Company paid dividends of approximately $58 million in 2001. A $17
million dividend applicable to third quarter 2001 net income was paid in
November 2001. Prior to that, the Company paid dividends of $23 million in
September 2001 relating to the second quarter earnings and in June 2001
paid $18 million relating to the first quarter 2001 net income.

13

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of the Company's financial
instruments are as follows:

JUNE 30, DECEMBER 31,
2002 2001
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(In thousands)

Assets:
Cash and cash equivalents $ 20,937 $ 20,937 $ 34,797 $ 34,797
Accounts receivable, net 394,918 394,918 359,914 359,914
Liabilities:
Other current liabilities $311,246 $311,246 $345,203 $345,203
Short-term debt 308,846 308,846 494,335 498,649
Long-term debt, excluding interest rate swap 850,314 843,831 700,294 697,854
Interest rate swap 4,576 4,576 1,147 1,147

14. SEGMENT REPORTING

The Company has two reportable segments: Wireline and Wireless.

The Wireline segment consists of:

- Local services, including basic voice, telephone and
telecommunications equipment rentals, value-added services,
high-speed private line services, Internet access and public phone
service;

- Long distance services including direct dial on-island and
off-island, operator assisted calls, prepaid calling card and
high-speed private line services;

- Access services to long distance carriers, competitive local
exchange carriers, and cellular and paging operators to originate
and terminate calls on our network;

- Directory publishing rights services; and

- Telecommunication equipment sales and billing and collection
services to competing long distance operators in Puerto Rico.

The Wireless segment consists of:

- Cellular and paging services; and

- Wireless equipment sales.

The Company measures and evaluates the performance of its segments based
on EBITDA, which is a common industry profitability and liquidity
measurement. The accounting policies of the segments are the same as those
followed by the Company (See Note 2). The Company accounts for
intersegment revenues at market prices.

14

Segment results for the Company are as follow:

FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
--------- --------- --------- ---------

WIRELINE: (In thousands)
Revenues-
Local services $ 145,367 $ 144,291 $ 289,720 $ 285,443
Long distance services 36,325 47,842 75,249 94,572
Access services 84,505 92,874 167,315 183,743
Directory services and other 24,310 27,946 36,304 42,413
--------- --------- --------- ---------
Total revenues $ 290,507 $ 312,953 $ 568,588 $ 606,171
========= ========= ========= =========

EBITDA $ 126,468 $ 137,292 $ 235,684 $ 274,360
========= ========= ========= =========

WIRELESS:
Revenues-
Cellular services $ 43,171 $ 48,827 $ 85,816 $ 87,842
Paging services 1,361 4,180 3,286 9,680
Equipment sales and other 1,873 4,335 3,727 8,772
--------- --------- --------- ---------
Total revenues $ 46,405 $ 57,342 $ 92,829 $ 106,294
========= ========= ========= =========

EBITDA $ 12,090 $ 13,309 $ 19,673 $ 22,349
========= ========= ========= =========

CONSOLIDATED:
Revenues for reportable segments $ 336,912 $ 370,295 $ 661,417 $ 712,465
Elimination of intersegment revenues (3,526) (2,499) (7,334) (4,163)
--------- --------- --------- ---------
Consolidated revenues $ 333,386 $ 367,796 $ 654,083 $ 708,302
========= ========= ========= =========

EBITDA:
Operating income $ 71,884 $ 83,921 $ 122,383 $ 160,841
Depreciation and amortization 66,674 66,680 132,974 135,868
--------- --------- --------- ---------
EBITDA $ 138,558 $ 150,601 $ 255,357 $ 296,709
========= ========= ========= =========

AS OF AS OF
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
------------ ------------

Wireline assets $ 2,676,817 $ 2,591,488

Wireless assets 272,465 468,062
------------ ------------

Segment assets $ 2,949,282 $ 3,059,550

Elimination of intersegment assets (184,823) (311,300)
------------ ------------

Consolidated assets $ 2,764,459 $ 2,748,250
============ ============

15

15. CONDENSED CONSOLIDATING INFORMATION

The Senior Notes are guaranteed by PRTC, a wholly owned subsidiary of the
Company (the "Guarantor Subsidiary"), but not guaranteed by the Company's
other three subsidiaries, Coqui.net, PRTLD, and Datacom (the
"Non-Guarantor Subsidiaries"). The guarantee by the Guarantor Subsidiary
is full and unconditional.

The following condensed consolidating financial information as of June 30,
2002 and December 31, 2001 and for the quarter and six months ended June
30, 2002 and 2001, respectively, presents the financial position, results
of operations and cash flows of (i) the Company as if it accounted for its
subsidiaries on the equity method, (ii) the Guarantor Subsidiary; and
(iii) the Non-Guarantor Subsidiaries on a combined basis. The
consolidation entries eliminate investments in subsidiaries and
intercompany balances and transactions.

16

CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2002
(In thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ -- $ 18,500 $ 2,437 $ -- $ 20,937
Intercompany accounts receivable 1,320,179 167,286 17,537 (1,505,002) --
Accounts receivable, net -- 394,926 (8) -- 394,918
Inventory and supplies, net -- 21,049 -- -- 21,049
Prepaid expenses -- 17,495 462 -- 17,957
----------- ------------ ------------- ------------ ------------
Total current assets 1,320,179 619,256 20,428 (1,505,002) 454,861
PROPERTY, PLANT AND EQUIPMENT, net -- 1,576,519 7,146 -- 1,583,665
GOODWILL AND OTHER INTANGIBLES, net -- 281,762 25,327 -- 307,089
DEFERRED INCOME TAX -- 306,703 375 -- 307,078
INVESTMENT IN SUBSIDIARIES 577,146 -- -- (577,146) --
OTHER ASSETS 9,523 111,715 -- (9,472) 111,766
----------- ------------ ------------- ------------ ------------
TOTAL ASSETS $ 1,906,848 $ 2,895,955 $ 53,276 $ (2,091,620) $ 2,764,459
=========== ============ ============= ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term debt $ 308,702 $ 308,846 $ -- $ (308,702) $ 308,846
Intercompany accounts payable 68,834 270,360 12,219 (351,413) --
Other current liabilities 6,919 299,342 4,985 -- 311,246
----------- ------------ ------------- ------------ ------------
Total current liabilities 384,455 878,548 17,204 (660,115) 620,092
LONG-TERM DEBT, excluding current portion 854,359 854,890 -- (854,359) 854,890
OTHER NON-CURRENT LIABILITIES 2,000 610,022 -- -- 612,022
----------- ------------ ------------- ------------ ------------
Total liabilities 1,240,814 2,343,460 17,204 (1,514,474) 2,087,004
----------- ------------ ------------- ------------ ------------
MINORITY INTEREST -- -- -- 11,421 11,421
----------- ------------ ------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, Additional paid in capital
and Treasury stock 701,952 489,627 37,106 (526,733) 701,952
Deferred ESOP compensation (28,793) -- -- -- (28,793)
Subscription receivable (73,237) -- -- -- (73,237)
Retained earnings (deficit) 144,589 141,345 (1,034) (140,311) 144,589
Accumulated other comprehensive loss (78,477) (78,477) -- 78,477 (78,477)
----------- ------------ ------------- ------------ ------------
Total shareholders' equity 666,034 552,495 36,072 (588,567) 666,034
----------- ------------ ------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,906,848 $ 2,895,955 $ 53,276 $ (2,091,620) $ 2,764,459
=========== ============ ============= ============ ============

17

CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2001
(In thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ -- $ 32,591 $ 2,206 $ -- $ 34,797
Intercompany accounts receivable 1,316,922 311,067 233 (1,628,222) --
Accounts receivable, net -- 359,521 393 -- 359,914
Inventory and supplies, net -- 24,755 -- -- 24,755
Prepaid expenses -- 11,200 410 -- 11,610
----------- ------------ ------------- ------------ ------------
Total current assets 1,316,922 739,134 3,242 (1,628,222) 431,076
PROPERTY, PLANT AND EQUIPMENT, net -- 1,623,717 8,053 -- 1,631,770
GOODWILL AND OTHER INTANGIBLES, net -- 332,836 25,628 -- 358,464
DEFERRED INCOME TAX -- 221,324 175 -- 221,499
INVESTMENT IN SUBSIDIARIES 486,201 -- -- (486,201) --
OTHER ASSETS 6,190 105,441 -- (6,190) 105,441
----------- ------------ ------------- ------------ ------------
TOTAL ASSETS $ 1,809,313 $ 3,022,452 $ 37,098 $ (2,120,613) $ 2,748,250
=========== ============ ============= ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term debt $ 494,100 $ 494,335 $ -- $ (494,100) $ 494,335
Intercompany accounts payable 65,715 371,007 2,688 (439,410) --
Other current liabilities 8,280 335,274 1,649 -- 345,203
----------- ------------ ------------- ------------ ------------
Total current liabilities 568,095 1,200,616 4,337 (933,510) 839,538
LONG-TERM DEBT, excluding current portion 700,903 701,441 -- (700,903) 701,441
OTHER NON-CURRENT LIABILITIES 2,000 656,197 -- -- 658,197
----------- ------------ ------------- ------------ ------------
Total liabilities 1,270,998 2,558,254 4,337 (1,634,413) 2,199,176
----------- ------------ ------------- ------------ ------------
MINORITY INTEREST -- -- -- 10,759 10,759
----------- ------------ ------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, Additional paid in capital
and Treasury stock 701,952 490,927 35,806 (526,733) 701,952
Deferred ESOP compensation (28,793) -- -- -- (28,793)
Subscription receivable (109,959) -- -- -- (109,959)
Retained earnings (deficit) 53,592 51,748 (3,045) (48,703) 53,592
Accumulated other comprehensive loss (78,477) (78,477) -- 78,477 (78,477)
----------- ------------ ------------- ------------ ------------
Total shareholders' equity 538,315 464,198 32,761 (496,959) 538,315
----------- ------------ ------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,809,313 $ 3,022,452 $ 37,098 $ (2,120,613) $ 2,748,250
=========== ============ ============= ============ ============

18

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended June 30, 2002
(In thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------

REVENUES:
Local services $ -- $ 141,092 $ 5,947 $ (2,393) $ 144,646
Long distance services -- 31,825 4,503 (135) 36,193
Access services -- 85,591 -- (2,552) 83,039
Cellular services -- 43,171 -- (393) 42,778
Paging services -- 1,361 -- 2 1,363
Directory and other services and sales -- 28,687 -- (3,320) 25,367
----------- ------------ ------------- ------------ ------------
Total revenues -- 331,727 10,450 (8,791) 333,386
----------- ------------ ------------- ------------ ------------

OPERATING COSTS AND EXPENSES:
Labor and benefits -- 90,297 583 -- 90,880
Other operating expenses -- 105,295 7,444 (8,791) 103,948
Depreciation and amortization -- 65,929 745 -- 66,674
----------- ------------ ------------- ------------ ------------
Total operating costs and expenses -- 261,521 8,772 (8,791) 261,502
----------- ------------ ------------- ------------ ------------

OPERATING INCOME -- 70,206 1,678 -- 71,884
----------- ------------ ------------- ------------ ------------

OTHER INCOME (EXPENSE), NET 80,602 (10,994) (12) (80,897) (11,301)
----------- ------------ ------------- ------------ ------------

INCOME BEFORE INCOME TAX EXPENSE 80,602 59,212 1,666 (80,897) 60,583

INCOME TAX BENEFIT (EXPENSE) -- 20,734 (715) -- 20,019
----------- ------------ ------------- ------------ ------------

NET INCOME AND COMPREHENSIVE INCOME $ 80,602 $ 79,946 $ 951 $ (80,897) $ 80,602
=========== ============ ============= ============ ============

19

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended June 30, 2001
(In thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------

REVENUES:
Local services $ -- $ 139,599 $ 5,681 $ (1,168) $ 144,112
Long distance services -- 47,909 -- (58) 47,851
Access services -- 94,496 -- (2,963) 91,533
Cellular services -- 49,464 -- (637) 48,827
Paging services -- 4,177 -- 3 4,180
Directory and other services and sales -- 34,616 -- (3,323) 31,293
----------- ------------ ------------- ------------ ------------
Total revenues -- 370,261 5,681 (8,146) 367,796
----------- ------------ ------------- ------------ ------------

OPERATING COSTS AND EXPENSES:
Labor and benefits -- 99,328 310 -- 99,638
Other operating expenses (5,034) 119,698 3,885 (8,146) 110,403
Early retirement provision -- 7,154 -- -- 7,154
Depreciation and amortization -- 65,225 1,455 -- 66,680
----------- ------------ ------------- ------------ ------------
Total operating costs and expenses (5,034) 291,405 5,650 (8,146) 283,875
----------- ------------ ------------- ------------ ------------

OPERATING INCOME 5,034 78,856 31 -- 83,921
----------- ------------ ------------- ------------ ------------

OTHER INCOME (EXPENSE), net 41,582 (16,883) 10 (39,463) (14,754)
----------- ------------ ------------- ------------ ------------

INCOME BEFORE INCOME TAX EXPENSE 46,616 61,973 41 (39,463) 69,167

INCOME TAX EXPENSE 291 22,421 130 -- 22,842
----------- ------------ ------------- ------------ ------------

NET INCOME (LOSS) AND COMPREHENSIVE INCOME $ 46,325 $ 39,552 $ (89) $ (39,463) $ 46,325
=========== ============ ============= ============ ============

20

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the six months ended June 30, 2002
(In thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------

REVENUES:
Local services $ -- $ 278,863 $ 12,412 $ (4,830) $ 286,445
Long distance services -- 70,750 4,503 (268) 74,985
Access services -- 169,553 -- (5,416) 164,137
Cellular services -- 85,816 -- (815) 85,001
Paging services -- 3,286 -- 1 3,287
Directory and other services and sales -- 46,666 -- (6,438) 40,228
----------- ------------ ------------- ------------ ------------
Total revenues -- 654,934 16,915 (17,766) 654,083
----------- ------------ ------------- ------------ ------------

OPERATING COSTS AND EXPENSES:
Labor and benefits -- 187,531 1,108 -- 188,639
Other operating expenses -- 217,178 10,675 (17,766) 210,087
Early retirement provision -- -- -- -- --
Depreciation and amortization -- 131,440 1,534 -- 132,974
----------- ------------ ------------- ------------ ------------
Total operating costs and expenses -- 536,149 13,317 (17,766) 531,700
----------- ------------ ------------- ------------ ------------

OPERATING INCOME -- 118,785 3,598 -- 122,383
----------- ------------ ------------- ------------ ------------

OTHER INCOME (EXPENSE), NET 103,606 (24,550) (1) (104,266) (25,211)
----------- ------------ ------------- ------------ ------------

INCOME (LOSS) BEFORE INCOME TAX 103,606 94,235 3,597 (104,266) 97,172

INCOME TAX BENEFIT (EXPENSE) -- 7,973 (1,539) -- 6,434
----------- ------------ ------------- ------------ ------------

NET INCOME AND COMPREHENSIVE INCOME $ 103,606 $ 102,208 $ 2,058 $ (104,266) $ 103,606
=========== ============ ============= ============ ============

21

CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the six months ended June 30, 2001
(In thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------

REVENUES:
Local services $ -- $ 274,267 $ 11,176 $ (1,996) $ 283,447
Long distance services -- 94,727 -- (173) 94,554
Access services -- 186,973 -- (5,379) 181,594
Cellular services -- 88,815 -- (973) 87,842
Paging services -- 9,682 -- (2) 9,680
Directory and other services and sales -- 59,467 -- (8,282) 51,185
----------- ------------ ------------- ------------ ------------
Total revenues -- 713,931 11,176 (16,805) 708,302
----------- ------------ ------------- ------------ ------------

OPERATING COSTS AND EXPENSES:
Labor and benefits -- 196,323 622 -- 196,945
Other operating expenses (5,034) 218,324 7,163 (16,805) 203,648
Early retirement provision -- 11,000 -- -- 11,000
Depreciation and amortization -- 132,909 2,959 -- 135,868
----------- ------------ ------------- ------------ ------------
Total operating costs and expenses (5,034) 558,556 10,744 (16,805) 547,461
----------- ------------ ------------- ------------ ------------

OPERATING INCOME 5,034 155,375 432 -- 160,841
----------- ------------ ------------- ------------ ------------

OTHER INCOME (EXPENSE), NET 78,058 (33,833) 18 (73,453) (29,210)
----------- ------------ ------------- ------------ ------------

INCOME BEFORE INCOME TAX EXPENSE 83,092 121,542 450 (73,453) 131,631

INCOME TAX EXPENSE 304 47,939 600 -- 48,843
----------- ------------ ------------- ------------ ------------

NET INCOME (LOSS) AND COMPREHENSIVE INCOME $ 82,788 $ 73,603 $ (150) $ (73,453) $ 82,788
=========== ============ ============= ============ ============

22

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2002
(In thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARY SUBSIDIARIES CONSOLIDATED
----------- ------------ ------------- ------------

CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES: $ (15) $ 78,331 $ 496 $ 78,812
----------- ------------ ------------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs -- (85,291) (64) (85,355)
Net salvage on retirements -- 956 (201) 755
----------- ------------ ------------- ------------
Net cash used in investing activities -- (84,335) (265) (84,600)
----------- ------------ ------------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 -- -- 40,000
Net repayments of short-term debt, including
capital leases (185,371) (92) -- (185,463)
Borrowings of long-term debt 150,000 -- -- 150,000
Dividends paid (12,609) -- -- (12,609)
Borrowings/(repayments) intercompany loans 7,995 (7,995) -- --
----------- ------------ ------------- ------------
Net cash provided by (used in) financing activities 15 (8,087) -- (8,072)
----------- ------------ ------------- ------------

NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS -- (14,091) 231 (13,860)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD -- 32,591 2,206 34,797
----------- ------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 18,500 $ 2,437 $ 20,937
=========== ============ ============= ============

23

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2001
(In thousands)

GUARANTOR NON-GUARANTOR TOTAL
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
----------- ------------ ------------- ------------

CASH PROVIDED BY OPERATING
ACTIVITIES $ 2,301 $ 59,382 $ 159 $ 61,842
----------- ------------ ------------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including removal costs -- (68,044) (292) (68,336)
Net salvage on retirements -- (879) (151) (1,030)
Proceeds from sale of subsidiary stock 16,367 -- -- 16,367
----------- ------------ ------------- ------------
Net cash provided by (used in) investing activities 16,367 (68,923) (443) (52,999)
----------- ------------ ------------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 40,000 -- -- 40,000
Net borrowings (repayments) of short-term debt, including
capital leases (41,972) 67 -- (41,905)
Dividends paid (17,253) -- -- (17,253)
Borrowings/(repayments) intercompany loans 554 (554) -- --
----------- ------------ ------------- ------------
Net cash used in financing activities (18,671) (487) -- (19,158)
----------- ------------ ------------- ------------

NET DECREASE IN CASH AND CASH
EQUIVALENTS (3) (10,028) (284) (10,315)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD -- 29,950 884 30,834
----------- ------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ (3) $ 19,922 $ 600 $ 20,519
=========== ============ ============= ============

24

16. CONTINGENCIES AND REGULATORY MATTERS

The Company is a defendant in various legal matters arising in the
ordinary course of business. Management, after consultation with legal
counsel, believe at this time that the resolution of these matters will
not have a material adverse effect on the Company's financial position and
results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Regulatory Matters" for
more information regarding legal and regulatory matters, including a
regulatory dispute regarding intra-island access fees charged to long
distance carriers.

In connection with the privatization of the Company, the PRTA agreed to
indemnify, defend and hold the Company harmless for specified litigation
in excess of $50 million in the aggregate, including one environmental
matter.

The Company is regulated by the FCC for inter-state wireline services and
by the Puerto Rico Telecommunications Board ("TRB") for intra-state
wireline services.

25

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In this Form 10-Q, we have made forward-looking statements. These
statements are based on Company estimates and assumptions and are subject to
certain risks and uncertainties. Forward-looking statements include information
concerning possible or assumed future results of operations, as well as those
statements preceded or followed by the words "anticipates," "believes,"
"estimates," "expects," "hopes," "targets" or similar expressions.

Future results could be affected by subsequent events and could differ
materially from those expressed in the forward-looking statements. If future
events and actual performance differ from the Company's assumptions, the actual
results could vary significantly from the performance projected in the
forward-looking statements.

The following important factors could affect future results and could
cause those results to differ materially from those expressed in the
forward-looking statements: (1) materially adverse changes in economic
conditions in Puerto Rico; (2) material changes in available technology; (3) the
final resolution of regulatory initiatives and proceedings, including
arbitration proceedings pertaining to, among other matters, the terms of
interconnection, access charges, universal service, unbundled network elements
and resale rates; (4) changes in our accounting assumptions that may be required
by regulatory agencies, including the SEC, or that result from changes in the
accounting rules or their application, which could result in an impact on
earnings; and (5) the extent, timing, success and overall effects of competition
from others in the Puerto Rico telecommunications service industry.

CRITICAL ACCOUNTING POLICIES

GENERAL

The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's unaudited condensed
consolidated financial statements, which have been prepared pursuant to rules
and regulations of the SEC. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations.

The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported interim amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to bad debts, intangible assets, income taxes, financing
operations, contingencies and litigation. The Company's management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
condensed consolidated financial statements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Because of uncertainties inherent in the estimation
process, management's estimate of losses and the related allowance may change.
The Company is not dependent on any single customer.

DEFERRED TAXES

The Company uses an asset and liability approach in accounting for income
taxes following the provisions of SFAS No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are established for temporary differences

26

between the way certain income and expense items are reported for financial
reporting and tax purposes. Deferred tax assets and liabilities are adjusted to
the extent necessary to reflect tax rates expected to be in effect when
temporary differences reverse.

The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company determine that it would not
be able to realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.

As discussed in Note 1 to the condensed consolidated financial statements,
the Company executed a reorganization plan, which became effective May 1, 2002,
whereby Verizon Wireless merged into PRTC. As a result of this merger, the
Company released a deferred tax valuation allowance, related to the Acquisition,
of approximately $93 million, of which approximately $51 million was recorded
against goodwill and approximately $42 million was recorded as a deferred tax
benefit in the Company's consolidated statement of income during the second
quarter of 2002 in accordance with SFAS 109. Management believes that sufficient
book and tax income will be generated by the merged company to realize the
benefits of these tax assets.

GOODWILL AND INTANGIBLE IMPAIRMENT

In assessing the recoverability of the Company's goodwill and other
intangibles, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets not previously
recorded. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," and has evaluated, on a reporting unit basis, its
goodwill and other indefinite life intangibles for impairment during the six
months period ended June 30, 2002. See Note 3 to the condensed consolidated
financial statements for further details.

RESULTS OF OPERATIONS

We have two reportable segments, Wireline and Wireless. See Note 14 to the
condensed consolidated financial statements for additional information on our
segments. Reclassifications of prior years' data have been made to conform to
the 2002 presentation.

The Wireline segment consists of:

- - Local services, including basic voice, telephone and telecommunications
equipment rentals, value-added services, high-speed private line services,
Internet access and public phone service;

- - Long distance services including direct dial on-island and off-island,
operator assisted calls, prepaid calling card and high-speed private line
services;

- - Access services to long distance carriers, competitive local exchange
carriers, and cellular and paging operators to originate and terminate
calls on our network;

- - Directory publishing rights revenues; and

- - Telecommunication equipment sales and billing and collection services to
competing long distance operators in Puerto Rico.

The Wireless segment consists of:

- - Cellular and paging services; and Wireless equipment sales.

27

REVENUES

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------

2002 2001 2002 2001
------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)

WIRELINE:
Local $145 43% $144 39% $287 44% $283 40%
Long Distance 36 11 48 13 75 11 95 13
Network Access 83 25 92 25 164 25 182 26
Directory and Other 23 7 25 7 36 5 41 6
---- ---- ---- ---- ---- ---- ---- ----
Total Wireline 287 86% 309 84% 562 85% 601 85%
---- ---- ---- ---- ---- ---- ---- ----

WIRELESS:
Postpaid Cellular 36 11 41 11 72 11 73 11
Prepaid Cellular 7 2 8 3 13 2 15 2
---- ---- ---- ---- ---- ---- ---- ----
Total Cellular 43 13 49 14 85 13 88 13
Paging 1 -- 4 1 3 1 10 1
Wireless Equipment 2 1 5 1 4 1 9 1
---- ---- ---- ---- ---- ---- ---- ----

Total Wireless 46 14% 58 16% 92 15% 107 15%
---- ---- ---- ---- ---- ---- ---- ----

Revenues $333 100% $367 100% $654 100% $708 100%
==== ==== ==== ==== ==== ==== ==== ====

EXPENSES AND CHARGES

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)

WIRELINE:

Labor and benefits $ 82 $ 90 $ 172 $ 179
Other operating expenses 81 77 160 141
-------- -------- -------- --------
Total Wireline 163 167 332 320

WIRELESS:

Labor and benefits $ 8 $ 10 $ 16 $ 18
Other operating expenses 23 32 50 62
-------- -------- -------- --------
Total Wireless 31 42 66 80

OTHER:

Early retirement provision $ -- $ 7 $ -- $ 11
Depreciation and amortization 67 67 133 136
Interest expense, net 11 15 25 30
Equity income in joint venture -- -- (1) (1)
Minority interest in consolidated subsidiary -- -- 1 --
Income tax (benefit) expense (20) 23 (6) 49
-------- -------- -------- --------

Net income $ 81 $ 46 $ 104 $ 83
======== ======== ======== ========

OPERATING DATA

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
-------- -------- -------- --------

Access Lines in Service (000's):
Residential 961 974 961 974
Business 308 307 308 307
-------- -------- -------- --------
Total 1,269 1,281 1,269 1,281

Cellular Customers (000's):
Postpaid 213 214 213 214
Prepaid 112 137 112 137
-------- -------- -------- --------
Total 325 351 325 351

Postpaid Cellular Average Revenue per Unit
(ARPU) $ 53 $ 61 $ 53 $ 56
Prepaid Cellular ARPU 20 18 20 19
Combined Cellular ARPU 42 42 42 41

Paging Customers (000's) 26 77 26 77

28

QUARTER ENDED JUNE 30, 2002 COMPARED WITH QUARTER ENDED JUNE 30, 2001

REVENUES. Revenues for the quarter ended June 30, 2002 decreased $34
million, or 9%, to $333 million from $367 million for the same 2001 period.

WIRELINE:

Wireline revenues include local service, network access, long distance,
directory revenues and other services. Wireline revenues for the quarter ended
June 30, 2002 decreased $22 million, or 7%, to $287 million from $309 million
for the same 2001 period.

Local service revenues include basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, and public phone service. Local service revenues
for the quarter ended June 30, 2002 increased $1 million to $145 million from
$144 million for the same 2001 period. This increase was mainly due to higher
directory assistance revenue, high-speed private lines and measured service
revenue of $2 million, $2 million and $1 million, respectively. These increases
were partially offset by a decrease in public phone and telephone rent revenue
of $3 million and $1 million, respectively.

Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling cards and on-island private line
revenues. Long distance revenues decreased $12 million, or 25%, to $36 million
for the quarter from $48 million for the same 2001 period. The decrease was due
to a decrease in intra-island long distance revenues of $8 million, a decrease
in operator services of $2 million and a decrease in off-island revenues of $2
million. Long distance revenues have decreased mainly due to long distance calls
being included in cellular calling plans.

Network access revenues include services provided to long distance
carriers, competitive local exchange carriers, and cellular and paging operators
to originate and terminate calls on our network. These revenues for the quarter
decreased $9 million, or 10%, to $83 million compared to $92 million for the
same 2001 period. The decrease was caused by a decrease in interstate high cost
fund subsidies of $9 million, reflecting a phasing out of this subsidy (see
"Regulatory Matters-Interstate High Cost Subsidy").

Directory and other revenues include directory publishing rights,
telecommunications equipment rental and billing and collection services to
competitor long distance operators. Directory and other revenues decreased $2
million, or 8%, to $23 million for the quarter from $25 million for the same
2001 quarter. This decrease was mainly due to decreased billing and collection
services provided to carriers.

WIRELESS:

Revenues from cellular and paging services and related equipment sales for
the three months ended June 30, 2002 decreased $12 million, or 21%, to $46
million from $58 million for the comparable 2001 period. Cellular service
revenues decreased $6 million, or 12%, as a result of a reduction of
approximately 26,000 cellular customers in comparison with the quarter ended
June 30, 2001. Postpaid cellular ARPU of $53 decreased by $8 as a result of
lower customer usage.

Paging revenues declined $3 million, or 75%, to $1 million for the quarter
ended June 30, 2002 from $4 million for the comparable 2001 period. The decrease
was related to a reduction of approximately 51,000 customers.

Wireless equipment sales decreased $3 million, or 60%, to $2 million for
the quarter ended June 30, 2002 from $5 million for the comparable 2001 period.

OPERATING COSTS AND EXPENSES. Operating costs and expenses for the quarter
ended June 30, 2002 decreased $15 million, or 7%, to $194 million from $209
million reported for the second quarter in 2001.

29

WIRELINE:

Wireline expenses for the quarter ended June 30, 2002 decreased $4
million, or 2%, to $163 million from the $167 million reported for the quarter
ended June 30, 2001.

Labor and benefit expenses decreased $8 million, or 9%, to $82 million
from $90 million reported for the quarter ended June 30, 2001. This decrease in
labor and benefit expenses primarily reflects the effect of early retirements
and voluntary separation programs as well as a reduction in overtime expense.

Other operating expenses of $81 million for the quarter ended June 30,
2002, increased $4 million, or 5%, compared to the same 2001 period. The
increase is primarily due to higher operating tax provisions of $5 million, $5
million gain from the sale of a 33% interest in Coqui.net in 2001, and higher
wireless interconnection expense of $3 million. This increase was partially
offset by a decrease in bad debt provisions of $3 million, off-island long
distance access of $2 million, consulting expense of $2 million and advertising
expense of $1 million.

WIRELESS:

Wireless expenses for the quarter ended June 30, 2002, decreased $11
million, or 26%, to $31 million from the $42 million reported for the quarter
ended June 30, 2001.

Labor and benefit expenses for the quarter ended June 30, 2002, decreased
$2 million, or 20%, to $8 million from the $10 million reported for the quarter
ended June 30, 2001. The decrease in labor and benefit expenses is mainly due to
lower labor costs, overtime, fringe benefits and commission expense.

Other operating expenses decreased $9 million, or 28%, to $23 million from
the $32 million reported for the comparable 2001 period. The decrease was mainly
due to lower costs from equipment sales of $11 million and a $2 million gain on
sale of assets. The decrease was offset in part by an increase in bad debt
provisions of $4 million.

EARLY RETIREMENT AND VOLUNTARY SEPARATION PROVISIONS. An early retirement
and voluntary separation program was offered to approximately 200 non-union
employees in the Customer Contact division during the first quarter of 2001.
Those eligible to retire received a credit for three years additional service,
three years of additional age; a separation bonus based on years of service,
averaging eight months of salary, and were immediately eligible for retiree
medical benefits. Non-retirement eligible employees received the separation
bonus. A $7 million provision was recorded in the second quarter of 2001 based
on 19 early retirement and 52 voluntary separation acceptances during this
period.

DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense of $67 million remained constant for the quarter ended June 30, 2002
compared to the same 2001 period. The discontinued amortization of goodwill and
other indefinite life intangibles reduced amortization expense by $4 million for
the quarter ended June 30, 2002. This decrease was offset by $4 million in
higher depreciation as a result of higher gross plant balances.

INTEREST EXPENSE. Interest expense of $11 million for the quarter ended
June 30, 2002 was $4 million lower than for the comparable 2001. As a result of
lower interest rates our interest expense decreased by $5 million, as debt
balances remained constant at $1.2 billion for June 30, 2002 and 2001. This
decrease was offset by lower interest income of $1 million from the accretion of
the discount on the subscription receivable.

EQUITY INCOME FROM JOINT VENTURE. Earnings of $0.6 million were generated
for the three months ended June 30, 2002 from our approximate 25% interest in
VISI, the largest yellow page publishing company in Puerto Rico.

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. A $0.3 million minority
interest included in the Company's results of operations for the three months
ended June 30, 2002 represents the minority share of the loss of Popular's, Inc.
33% investment in Coqui.net, our ISP subsidiary.

30

INCOME TAXES. A $20 million tax benefit for the quarter ended June 30,
2002 reflects the tax effect of the merger of Verizon Wireless into PRTC (See
Note 1 to the condensed consolidated financial statements). As a result of this
merger, the Company released a deferred tax valuation allowance of approximately
$93 million, of which approximately $51 million was recorded against goodwill
and approximately $42 million of which was recorded as a deferred tax benefit
during the second quarter of 2002. This tax benefit was offset in part by a tax
provision that reflects a 36% effective tax rate. The difference between the
effective and the statutory tax rate of 39%, or $2 million, primarily reflects
permanent differences related to interest accretion on the Government
subscription receivable, which is a capital contribution, and joint venture
equity income.

31

SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001

REVENUES. Revenues for the six months ended June 30, 2002 decreased $54
million, or 8%, to $654 million from $708 million for the same 2001 comparable
period.

WIRELINE:

Wireline revenues include local service, network access, long distance,
directory revenues and other services. Wireline revenues for the six months
ended June 30, 2002 decreased $39 million, or 6%, to $562 million from $601
million for the same 2001 period.

Local service revenues include basic voice, telephone and
telecommunications equipment rental, value-added services, high-speed private
line services, Internet access, and public phone service. Local service revenues
for the six months ended June 30, 2002 increased $4 million, or 1%, to $287
million from $283 million in the comparable 2001 period. The increase resulted
primarily from higher revenues from high-speed private lines, directory
assistance, and Internet access of $5 million, $2 million, and $1 million,
respectively. These increases were offset in part by a decrease in public phone
revenues and local voice revenues of $3 million and $1 million, respectively.

Long distance revenues include direct dial on-island and off-island,
operator-assisted calls, prepaid calling cards and on-island private line
revenues. Long distance revenues decreased $20 million, or 21%, to $75 million
for the six months from $95 million for the same 2001 period. The decrease was
due to a decrease in intra-island long distance revenues of $13 million, a
decrease in operator services of $4 million and a decrease in off-island long
distance revenues of $3 million. Long distance revenues have decreased mainly
due to long distance calls being included in cellular calling plans.

Network access revenues include services provided to long distance
carriers, competitive local exchange carriers, and cellular and paging operators
to originate and terminate calls on our network. These revenues for the six
months ended June 30, 2002 decreased $18 million, or 10%, to $164 million
compared to $182 million for the same 2001 period. The decrease was primarily
caused by a decrease in interstate high cost fund subsidies of $17 million,
reflecting a phasing out of this subsidy (see "Regulatory Matters-Interstate
High Cost Subsidy").

Directory and other revenues include directory publishing rights,
telecommunication equipment and billing and collection services to competitor
long distance operators. Directory and other revenues for the six months ended
June 30, 2002 decreased $5 million, or 12%, to $36 million from $41 million for
the six months ended June 30, 2001, mainly due to a decrease in billing and
collection services revenues of $2 million, a reduction in other services to
carriers revenues of $2 million and a decrease in wireline equipment sales
revenues of $1 million.

WIRELESS:

Revenues from cellular and paging services and related equipment sales for
the six months ended June 30, 2002 decreased $15 million, or 14%, to $92 million
from $107 million for the comparable 2001 period. Cellular service revenues
decreased $3 million, or 3%, as a result of a decrease in cellular customers of
approximately 26,000 compared to the six months ended June 30, 2001. Postpaid
cellular ARPU of $53 decreased by $3 as a result of lower customer usage.

Paging revenues declined $7 million, or 70%, to $3 million for the six
months ended June 30, 2002 from $10 million for the comparable 2001 period. The
decrease was related to a reduction of 51,000 customers.

Wireless equipment sales decreased $5 million, or 56%, to $4 million for
the six months ended June 30, 2002 from $9 million for the comparable 2001
period.

OPERATING COSTS AND EXPENSES. Operating costs and expenses for the six
months ended June 30, 2002 decreased $2 million, to $398 million from $400
million reported for the first six months in 2001.

32

WIRELINE:

Wireline expenses for the six months ended June 30, 2002 increased $12
million, or 4%, to $332 million from the $320 million reported for the six
months ended June 30, 2001.

Labor and benefit expenses decreased $7 million, or 4%, to $172 million
from $179 million reported for the six months ended June 30, 2001. This decrease
in labor and benefit expense primarily reflects the effect of early retirements
and voluntary separation programs as well as a reduction in overtime expense.

Other operating expenses of $160 million for the six months ended June 30,
2002, increased $19 million, or 13%, compared to the same 2001 period. The
increase is primarily due to higher operating tax provisions of $13 million, $5
million gain from the sale of a 33% interest in Coqui.net in 2001, higher
interconnection charges of $5 million and higher regulatory fees of $1 million.
This was offset by a decrease in consulting and advertising expenses of $3
million and $2 million, respectively.

WIRELESS:

Wireless expenses for the six months ended June 30, 2002, decreased $14
million, or 18%, to $66 million from the $80 million reported for the six months
ended June 30, 2001.

Labor and benefit expenses decreased $2 million, or 11%, from the $18
million reported for the six months ended 2001. The decrease in labor and
benefits expenses is mainly due to lower overtime, commissions and temporary
employee expenses.

Other operating expenses decreased $12 million, or 19%, to $50 million
from the $62 million reported for the comparable 2001 period. The decrease was
due to lower costs from equipment sales of $15 million and a $2 million gain on
the sale of assets. These decreases were offset by increases in provision for
bad debts of $4 million and roaming charges of $1 million.

EARLY RETIREMENT AND VOLUNTARY SEPARATION PROVISIONS. An early retirement
program was offered to management employees in December 2000. Those choosing to
retire received a credit for three years additional service, five years of
additional age, and were immediately eligible for retiree medical benefits. A $4
million non-cash provision was recorded in the first quarter of 2001 based on 13
employee acceptances during this period.

In addition, an early retirement and voluntary separation program was
offered to approximately 200 non-union employees in the Customer Contact
organization in the first quarter of 2001. Those eligible to retire received a
credit for three years additional service, three years of additional age; a
separation bonus based on years of service, averaging eight months of salary,
and were immediately eligible for retiree medical benefits. Non-retirement
eligible employees received the separation bonus. A $7 million provision was
recorded in the second quarter of 2001 based on 19 early retirement and 52
voluntary separation acceptances during this period. A total of $11 million
provision was recorded by the Company in connection with these early retirement
and voluntary separation programs for the six months period ended June 30, 2001.

DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense of $133 million for the six months ended June 30, 2002 was $3 million
lower than for the comparable 2001 period. The discontinued amortization of
goodwill and other indefinite life intangibles reduced amortization by $8
million for the six months ended June 30, 2002. This decrease was offset in part
by $5 million in higher depreciation due to higher gross plant balances.

INTEREST EXPENSE. Interest expense of $25 million decreased $5 million, or
17%, from $30 million reported for the six months ended June 30, 2001. As a
result of lower interest rates our interest expense decreased by $7 million, as
debt balances remained constant at $1.2 billion for June 30, 2002 and 2001. This
decrease was offset by lower interest income from invested cash of $1 million
due to the lower rates and lower interest income of $1 million resulting from
the accretion of the discount on the subscription receivable.

EQUITY INCOME FROM JOINT VENTURE. Earnings of $1 million were generated
for the six months ended June 30, 2002 from our approximate 25% interest in
VISI.

33

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY. A $0.7 million minority
interest included in the Company's results of operations for the six months
ended June 30, 2002 represents the minority share, of the income or loss of
Popular's, Inc. 33% investment in Coqui.net.

INCOME TAXES. A $6 million tax benefit for the six months ended June 30,
2002 reflects the tax effect of the merger of Verizon Wireless into PRTC (See
Note 1 to the condensed consolidated financial statements). As a result of this
merger, the Company released a deferred tax valuation allowance of approximately
$93 million, of which approximately $51 million was recorded against goodwill
and approximately $42 million of which was recorded as a deferred tax benefit
during the second quarter of 2002. This tax benefit was offset in part by a tax
provision that reflects a 37% effective tax rate. The difference between the
effective and the statutory tax rate of 39%, or $2 million, primarily reflects
permanent differences related to interest accretion on the Government
subscription receivable, which is a capital contribution, and joint venture
equity income.

34

LIQUIDITY AND CAPITAL RESOURCES

CONSOLIDATED FINANCIAL CONDITION

SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001

SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001 CHANGE
---- ---- ------
(DOLLARS IN MILLIONS)

Cash provided by (used in):
Operations $ 79 $ 62 $ 17
Investing (85) (53) (32)
Financing (8) (19) 11

OVERALL LIQUIDITY ASSESSMENT

The Company believes that cash from operations is sufficient to meet
working capital needs. While current liabilities exceeded current assets at June
30, 2002 by $165 million, we believe our sources of funds, from operations and
from readily available external financing arrangements, are sufficient to meet
ongoing operating, financing and investing requirements. We expect that
presently foreseeable capital requirements will continue to be financed through
internally generated funds.

Additionally, the Company has a undrawn $500 million revolving credit
facility maturing in March 2004 as well as a $90 million undrawn working capital
credit facility maturing in June 2003. An aggregate principal amount of $300
million of the Company's senior notes matured on May 15, 2002. The Company
refinanced these notes and the related interest payment through the issuance of
commercial paper and term loans.

OPERATIONS

The increase in cash from operations of $17 million for the six months
ended June 30, 2002, as compared to the same period in 2001, was primarily due
to lower payments of management fees and royalties of $79 million and a decrease
in income taxes of $26 million. This increase in cash from operations was
partially offset by higher disbursements including voluntary separation payments
of $14 million, an increase in pension contributions of $9 million, an increase
in operating tax payments of $5 million and a decrease in revenues of $54
million.

INVESTING

Net cash used in investing activities for the quarter ended June 30, 2002
was $85 million compared to $53 million for the same 2001 period. The increase
in cash used in investing activities of $32 million is mainly due to higher
capital expenditures, of $16 million and the absence of the $16 million proceeds
from the sale of 33% interest in Coqui.net to Popular Inc. recorded in the
second quarter of 2001.

The capital expenditure program for the six months ended June 30, 2002
amounted to $84 million, which was financed from internally generated funds. We
have invested approximately $775 million from the date of the Acquisition
through June 30, 2002 to expand and enhance our networks.

FINANCING

Debt, excluding capital leases, decreased $35 million for the six months
ended June 30, 2002. Borrowings under bank loans, working capital facilities,
term credit facilities and commercial paper decreased from $494 million at
December 31, 2001 to $459 million at June 30, 2002.

During the second quarter of 2002, we entered into two two-year and one
three-year term credit agreements with three different banks for $50 million
each. Amounts outstanding under these term credit agreements bear interest at a
rate of 70, 75, and 100 basis points over LIBOR, respectively.

35

The shareholders' agreement requires the payment of dividends equal to at
least 50% of net income, payable quarterly to the extent funds are legally
available. For the six months ended June 30, 2002, the Company paid dividends of
$13 million corresponding to the first quarter of 2002 and the fourth quarter of
2001. The senior note indentures and credit facility agreements do not contain
restrictions on the payment of dividends.

In the Acquisition, the PRTA agreed to contribute cash or stock worth a
total of $200 million as a capital contribution in five even $40 million
installments over five years beginning on March 2, 2000 to fund its underfunded
pension and other post-employment benefit obligations. In March 2002, $40
million was received in cash from the PRTA for the third installment. See Note
12 to the condensed consolidated financial statements.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

CONTRACTUAL OBLIGATIONS &
OTHER COMMERCIAL COMMITMENTS: PAYMENTS DUE BY PERIOD
- ----------------------------- ----------------------------------------------------------------------
Less Than After 5
(Dollars in Millions) Total 1 year 1-3 Years 4-5 Years Years
---------- ---------- ---------- ---------- ----------

Long Term Debt $ 704.4 $ -- $ -- $ 404.5 $ 299.9
Pension Benefit Obligations (1) 444.0 -- 260.3 183.7 --
Commercial Paper 308.7 308.7 -- -- --
Term Credit Facilities 150.0 -- 150.0 -- --
Operating Leases 41.8 4.6 18.9 7.4 10.9
Capital Lease Obligations 0.7 0.1 0.5 0.1 --
---------- ---------- ---------- ---------- ----------
Total $ 1,649.6 $ 313.4 $ 429.7 $ 595.7 $ 310.8
========== ========== ========== ========== ==========

(1) Pension obligations represent contributions based on ERISA minimum rules.

36

REGULATORY MATTERS

REGULATORY AND COMPETITIVE TRENDS

Regulatory activity at the federal and local levels has been primarily
directed at appropriately balancing downward pressure on access rates and the
impact of reductions in those rates on the cost of local exchange services. We
are also addressing local number portability requirements and dial-around
compensation relating to the pay phone business.

We continued to meet the wholesale requirements of new competitors and
have signed agreements with wireless and wireline carriers. These agreements
permit them to purchase unbundled network elements, to resell retail services,
and to interconnect their networks with ours.

INTRA-ISLAND LONG DISTANCE ACCESS RATE DISPUTE

On February 28, 2002, the TRB issued a Resolution and Order (the "February
2002 Order") with respect to the reconsideration requested by the Company of the
TRB October 10, 2001 order to reduce the access rates the Company charges to
long distance carriers to originate and terminate intra-island long distance
calls through the Company's network.

The February 2002 Order requires new rates for intra-island access to be
implemented through phased rate reductions over four years and directs PRTC to
make a cash refund to end-user customers. The prospective access rate reductions
(on a two-way basis) were ordered to take place on April 1st of each year as
follows:

April 2002: From 9.3 cents per minute to 7.9 cents per minute
April 2003: From 7.9 cents per minute to 6.5 cents per minute
April 2004: From 6.5 cents per minute to 5.0 cents per minute
April 2005: From 5.0 cents per minute to 2.1 cents per minute

The February 2002 Order also requires PRTC to pay a $68 million refund to
end-user customers. The TRB calculated this amount based on the difference
between the 9.3 cents and 7.9 cents rate for TRB estimated traffic from the
period April 1, 2000 through March 31, 2002. The refund can be made in 12
quarterly, equal installments starting April 1, 2002.

The Company filed with the Puerto Rico Circuit Court of Appeals ("Court")
an appeal of the February 2002 Order in which the Company alleges the TRB made
errors of law and procedure in its determination of access charges and its order
to make the cash refund. The Court stayed the refund and the rate reduction on
March 27, 2002 and is currently hearing the appeal.

On April 2, 2002, AT&T, Sprint and Telefonica Larga Distancia ("Carriers")
filed a petition with the Court for review of the February 2002 Order,
requesting the Court to order the rate reduction without a phase-in period,
remand the case back to the TRB and direct the TRB to calculate the refund from
and after April 1997 instead of April 2000, with the Carriers receiving the
refund instead of the end-user customers.

At present, the stay of the TRB's February 2002 Order is in effect. At
this preliminary stage it is too early to assess the probability of success in
the appeals process. The Company believes the Carriers' petition for review is
without merit.

PUBLIC TELEPHONE SERVICE PROVIDER DISPUTE

Telefonos Publicos de Puerto Rico, Inc. ("TPPR") the largest competitive
provider of public pay phones in Puerto Rico filed a suit in the United States
District Court for the District of Puerto Rico on November 8, 2001, claiming
predatory, exclusionary and anticompetitive acts and seeking damages of $75
million. We have filed a motion to dismiss the case and are awaiting a decision
of the court. Management believes the claim is without merit.

37

TOUCHTONE CHARGES

On July 2, 2002, three residential telephone service subscribers and one
business service subscriber filed a class action suit with the Superior Court of
Puerto Rico (the "Court") under the Puerto Rico Telecommunications Act of 1996
("Act"). The plaintiffs claim that the Company's charges for touchtone service
are not based on cost, and are therefore in violation of the Act. They have
requested that the Court (i) issue an Order certifying the case as a class
action, (ii) designate the plaintiffs as representatives of the class, (iii)
find that the charges are illegal, (iv) establish a maximum charge based on
cost, and (v) order the Company to reimburse every subscriber for excess
payments made since September 1996. At this preliminary stage of the process,
management and the Company's legal counsel are evaluating the case.

MEASURED SERVICE UNIT CHARGES

On July 16, 2002, one residential telephone service subscriber and three
business service subscribers filed a class action with the Court under the Act.
The plaintiffs claim that the Company's unit charges for local measured service
are not based on cost, and are therefore in violation of the Act. They have
requested that the Court (i) issue an Order certifying the case as a class
action, (ii) designate the plaintiffs as representatives of the class, (iii)
find that the unit charges are illegal, (iv) establish a maximum unit charge
based on cost, and (v) order the Company to reimburse every subscriber for
excess payments made since September 1996. At this preliminary stage of the
process, management and the Company's legal counsel are evaluating the case.

PRICE CAP REGULATION

The FCC requires that companies which set interstate access rates based on
a price cap formula must use the price cap formula for all of their affiliates.
This rule, which is referred to as the all-or-nothing rule, further states that
a company that has been using the rate of return method and that is acquired by
a price cap company has twelve months following the acquisition date to adopt
price caps. Under this rule PRTC would have been required to adopt price caps
instead of rate of return, since Verizon is a price cap company.

The Company has been requesting waivers of this rule since 1999 and has
been granted successive one-year extensions by the FCC. On April 18, 2002, the
FCC granted a further waiver of the requirement that PRTC adopt price caps to
June 30, 2003. The waiver, which was granted to the Company and to other local
exchange carriers in similar circumstances, also noted that the FCC was
considering in another ongoing proceeding whether to modify or eliminate the
all-or-nothing rule and how to resolve the associated universal support issues.
The impact to the Company is that it may continue as a rate of return carrier
and receive long-term support subsidies through its participation in the common
carrier line pool administered by NECA at least until June 30, 2003.

INTERSTATE HIGH COST SUBSIDY

On October 21, 1999, the FCC adopted a new high cost support mechanism,
which has resulted in the phase out of the Company's High Cost Subsidy
revenues. These revenues were $48 million in 2000, $33 million in 2001 and are
expected to be approximately $3 million for 2002.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 to the condensed consolidated financial statements in Item 1
(Part 1) of this Form 10-Q for disclosure on recent accounting pronouncements.

38

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

We are exposed to market risk in the normal course of business, resulting
primarily from interest rate changes on our senior notes and interest rate swap
agreements.

The following table summarizes the fair value of our senior notes and
interest rate swaps at June 30, 2002 and December 31, 2001 and provides a
sensitivity analysis of the fair values of these instruments assuming a 100
basis point increase or decrease in the yield curve. The sensitivity analysis
does not include the fair values of our floating-rate debt since it is not
significantly affected by changes in market interest rates.

FAIR VALUE
AT 100 BASIS POINTS
-------------------------
BOOK VALUE FAIR VALUE INCREASE DECREASE
---------- ---------- ---------- ----------
(In thousands)

June 30, 2002:

Senior notes $ 699,783 $ 693,300 $ 664,849 $ 723,332
Interest rate swap 4,576 4,576 595 9,855
---------- ---------- ---------- ----------
Total $ 704,359 $ 697,876 $ 665,444 $ 733,187
========== ========== ========== ==========

December 31, 2001:

Senior notes $ 999,757 $1,001,874 $ 969,805 $1,035,800
Interest rate swap 1,147 1,147 4,081 6,635
---------- ---------- ---------- ----------
Total $1,000,904 $1,003,021 $ 973,886 $1,042,435
========== ========== ========== ==========

39

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are a defendant in various legal matters arising in the ordinary course
of business. We, after consultation with legal counsel, believe at this time
that the resolution of these matters will not have a material adverse effect on
the Company's financial position and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Regulatory Matters" for more information regarding legal and regulatory matters,
including a regulatory dispute regarding intra-island access fees charged to
long distance carriers.

In connection with the privatization of the Company, the PRTA agreed to
indemnify, defend and hold the Company harmless for specified litigation in
excess of $50 million in the aggregate, including one environmental matter.

We are regulated by the FCC for inter-state wireline services and by
the TRB for intra-state wireline services.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits required by Item 601 of Regulation S-K.

10) Material Contracts

.25) Plan of Reorganization and Agreement of Merger, dated May
1, 2002, between Puerto Rico Telephone Company, Inc. and
Verizon Wireless Puerto Rico, Inc.

.26) $90 million working capital revolving credit agreement
between Telecomunicaciones de Puerto Rico, Inc., as borrower,
and Banco Popular de Puerto Rico, as lender and administrative
agent.

.27) $50 million two-year term credit agreement between
Telecomunicaciones de Puerto Rico, Inc., as borrower, Banco
Bilbao Vizcaya Argentaria, as lender and Banco Bilbao Vizcaya
Puerto Rico, as administrative agent.

.28) $50 million two-year term credit agreement between
Telecomunicaciones de Puerto Rico, Inc., as borrower, and HSBC
Bank USA, as lender.

.29) $50 million three-year term credit agreement between
Telecomunicaciones de Puerto Rico, Inc., as borrower, and
Australia and New Zealand Banking Group Limited, as lender and
administrative agent.

See Exhibit Index.

b) No reports on Form 8-K were filed during the second quarter of 2002.

40

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

TELECOMUNICACIONES DE PUERTO RICO, INC.

By: /s/ Jon E. Slater
--------------------------------------------
Name: Jon E. Slater
Title: Chief Executive Officer
Date: August 14, 2002

By: /s/ Willard J. Reagan
---------------------------------------------
Name: Willard J. Reagan
Title: Chief Financial Officer
Date: August 14, 2002

By: /s/ Robert P. Huberty
---------------------------------------------
Name: Robert P. Huberty
Title: Chief Accounting Officer
Date: August 14, 2002

The undersigned hereby certify that this Quarterly Report on Form 10-Q
fully complies with the requirements of Section [13(a)] [15(d)] of the
Securities Exchange Act of 1934 and that the information contained herein fairly
presents, in all material respects, the financial condition and results of
operations of the issuer.

TELECOMUNICACIONES DE PUERTO RICO, INC.

By: /s/ Jon E. Slater
-------------------------------------------

Name: Jon E. Slater
Title: Chief Executive Officer
Date: August 14, 2002

By: /s/ Willard J. Reagan
-------------------------------------------
Name: Willard J. Reagan
Title: Chief Financial Officer
Date: August 14, 2002

41

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------- ---------------------------------------------------------

3.1 Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).

3.2 Certificate of Amendment to the Certificate of Incorporation of
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on Form
10-K for the year ended December 31, 1999 (File 333-85503)).

3.3 By-Laws of Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 3.4 of the Company's
Registration Statement filed on Form S-4 (File 333-85503)).

3.4 Certificate of Incorporation of Celulares Telefonica, Inc.
(Incorporated by reference to Exhibit 3.3 of the Company's
Registration Statement filed on Form S-4 (File 333-85503)).

3.5 Certificate of Amendment to the Certificate of Incorporation of
Celulares Telefonica, Inc., as amended. (Incorporated by
reference to Exhibit 3.5 of the Company's Annual Report on Form
10-K for the year ended December 31, 2001 (File 333-85503)).

4.1 Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York. (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).

10.1 Shareholders Agreement, dated as of March 2, 1999, by and among
Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto
Rico) LLC, GTE International Telecommunications Incorporated,
Popular, Inc., Puerto Rico Telephone Authority and the
shareholders of Telecomunicaciones de Puerto Rico, Inc., who
shall from time to time be parties thereto as provided
therein. (Incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).

10.2 Amended and Restated Puerto Rico Management Agreement, dated as
of March 2, 1999, by and among Telecomunicaciones de Puerto
Rico, Inc., Puerto Rico Telephone Company, and GTE
International Telecommunications Incorporated. (Incorporated
by reference to Exhibit 10.6 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

10.3 Amended and Restated U.S. Management Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference
to Exhibit 10.7 of the Company's Registration Statement filed
on Form S-4 (File 333-85503)).

10.4 Amended and Restated Technology Transfer Agreement, dated as of
March 2, 1999, by and among Telecomunicaciones de Puerto Rico,
Inc., Puerto Rico Telephone Company, and GTE International
Telecommunications Incorporated. (Incorporated by reference
to Exhibit 10.8 of the Company's Registration Statement filed
on Form S-4 (File 333-85503)).

10.5 Non-Competition Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc, GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority,
and the Government Development Bank for Puerto Rico.
(Incorporated by reference to Exhibit 10.9 of the Company's
Registration Statement filed on Form S-4 (File 333-85503)).

10.6 Share Option Agreement, dated as of March 2, 1999, by and among
Puerto Rico Telephone Authority, Telecomunicaciones de Puerto
Rico, Inc, GTE Holdings (Puerto Rico) LLC, and GTE
International Telecommunications Incorporated. (Incorporated
by reference to Exhibit 10.10 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

42

10.7 Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of March 2,
1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.12 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

10.8 ESOP Loan Agreement, dated as of March 2, 1999, by and between
the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and Telecomunicaciones
de Puerto Rico, Inc. (Incorporated by reference to Exhibit
10.13 of the Company's Registration Statement filed on Form S-4
(File 333-85503)).

Stock Purchase Agreement, dated as of March 2, 1999, by and
10.9 between Puerto Rico Telephone Authority and the Trust of the
Employee Stock Ownership Plan of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 10.14 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).

10.10 Pledge Agreement, dated as of March 2, 1999, by and between the
Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and Telecomunicaciones
de Puerto Rico, Inc. (Incorporated by reference to Exhibit
10.15 of the Company's Registration Statement filed on Form S-4
(File 333-85503)).

10.11 Tag Along Agreement, dated as of March 2, 1999, by and among
GTE Holdings (Puerto Rico) LLC, GTE International
Telecommunications Incorporated, and the Trust of the Employee
Stock Ownership Plan of Telecomunicaciones de Puerto Rico,
Inc. (Incorporated by reference to Exhibit 10.16 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).

10.12 $500,000,000 Five-Year Credit Agreement, dated as of March 2,
1999, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company and Celulares
Telefonica, as Guarantors, the Initial Lenders named therein,
Citibank, N.A., as Administrative Agent, Bank of America
National Trust and Savings Association, as Syndication Agent,
and The Chase Manhattan Bank and Morgan Guaranty Trust Company
of New York, as Documentation Agents. (Incorporated by
reference to Exhibit 10.17 of the Company's Registration
Statement filed on Form S-4 (File 333-85503)).

10.13 Letter Amendment to the Five-Year Credit Agreement, dated May
7, 1999. (Incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement filed on Form S-4 (File
333-85503)).

10.14 Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2000 until
January 17, 2003. Approved on October 6, 2000. (Incorporated
by reference to Exhibit 10.23 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (File
333-85503)).

10.15 Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Brotherhood of Telephone
Company Employees effective from October 23, 1999 until October
22, 2003. Approved on October 20, 2000. (Incorporated by
reference to Exhibit 10.24 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (File
333-85503)).

10.16 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefonica, Inc.,
as Guarantors; and Merrill Lynch Money Markets Inc., as Dealer
for notes with maturities up to 240 days; Merrill Lynch,
Pierce, Fenner & Smith Incorporated, as Dealer for notes with
maturities over 270 days up to 365 days. Concerning notes to
be issued pursuant to an Issuing and Paying Agency Agreement
dated as of November 9, 2000 between the Issuer and The Chase
Manhattan Bank, as Issuing and Paying Agent. (Incorporated by
reference to Exhibit 10.25 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (File
333-85503)).

10.17 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefonica, Inc., as
Guarantors; and Salomon Smith Barney Inc., as Dealer.
Concerning notes to be issued pursuant to an Issuing and Paying
Agency Agreement dated as of November 9, 2000 between the
Issuer and The Chase Manhattan Bank, as Issuing and Paying
Agent. (Incorporated by reference to Exhibit 10.26 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).

43

10.18 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefonica, Inc., as
Guarantors; and Banc of America Securities LLC. Concerning
notes to be issued pursuant to an Issuing and Paying Agency
Agreement dated as of November 9, 2000 between the Issuer and
The Chase Manhattan Bank, as Issuing and Paying Agent.
(Incorporated by reference to Exhibit 10.27 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000
(File 333-85503)).

10.19 Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto Rico
Telephone Company, Inc. and Celulares Telefonica, Inc., as
Guarantors; and Popular Securities, Inc., as Dealer for notes
with maturities up to 365 days. Concerning notes to be issued
pursuant to an Issuing and Paying Agency Agreement dated as of
November 9, 2000 between the Issuer and The Chase Manhattan
Bank, as Issuing and Paying Agent. (Incorporated by reference
to Exhibit 10.28 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 (File 333-85503)).

10.20 Issuing and Paying Agency Agreement dated as of November 9,
2000, by and among Telecomunicaciones de Puerto Rico, Inc., as
Issuer, Puerto Rico Telephone Company and Celulares Telefonica,
Inc., as Guarantors, and The Chase Manhattan Bank, as Issuing
and Paying Agent. (Incorporated by reference to Exhibit 10.29
of the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).

10.21 Letter Amendment, to the March 2, 1999 Shareholders Agreement,
dated as of May 25, 2001, by and among Telecomunicaciones de
Puerto Rico, Inc., GTE Holdings (Puerto Rico) LLC, GTE
International Telecommunications Incorporated, Popular, Inc.,
and the Puerto Rico Telephone Authority. (Incorporated by
reference to Exhibit 10.25 of the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2001 (File 333-85503)).

10.22 Third Letter Amendment, dated August 3, 2001, to the Five-Year
Credit Agreement with Citibank, N.A., dated as of March 2,
1999, as amended by the Letter Amendment to Five-Year Credit
Agreement dated as of May 7, 1999 and as further amended by the
second Letter Amendment to Five-Year Credit Agreement dated as
of February 15, 2001. (Incorporated by reference to Exhibit
10.26 of the Company's Quarterly Report on Form 10-Q for the
period ended September 31, 2001 (File 333-85503)).

10.23 ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefonica, Inc.,
as Guarantors, and Bank of America, N.A., as the Bank.
(Incorporated by reference to Exhibit 10.27 of the Company's
Quarterly Report on Form 10-Q for the period ended September
31, 2001 (File 333-85503)).

10.24 ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefonica, Inc.,
as Guarantors, and Citibank, N.A., as the Bank. (Incorporated
by reference to Exhibit 10.28 of the Company's Quarterly Report
on Form 10-Q for the period ended September 31, 2001 (File
333-85503)).

10.25 Plan of Reorganization and Agreement of Merger, dated as of May
1, 2002, between Puerto Rico Telephone Company, Inc. and
Verizon Wireless Puerto Rico, Inc.

10.26 $90,000,000 working capital revolving credit agreement dated as
of May 16, 2002, among Telecomunicaciones de Puerto Rico, Inc.,
as Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and Banco Popular de Puerto Rico, as Lender and Administrative
Agent.

10.27 $50,000,000 2-Year term credit agreement dated as of May 16,
2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and Banco Bilbao Vizcaya Argentaria, S.A., as Lender and Banco
Bilbao Vizcaya Puerto Rico, as Administrative Agent.

44

10.28 $50,000,000 2-Year term credit agreement dated as of May 31,
2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and HSBC Bank USA, as Lender.

10.29 $50,000,000 2-Year term credit agreement dated as of June 24,
2002, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor,
and Australia and New Zealand Banking Group Limited, as Lender
and Administrative Agent.

45